Poor Economics: New ways of eradicating poverty

Excerpts from India Tonight on CNBC-TV18 Watch the full show »

Eradicating poverty is perhaps the highest priority of the Indian government and although statistics claim great success the truth is we still have hundreds of millions living in dire circumstances.

A recent examination of poverty suggests that we need to change the way we think of the problem and find new ways of tackling it. Abhijit Banerjee's and Esther Duflo's new book on stands, intrestingly titled, 'Poor Economics' provides an insight into the much talked about concern.

In an interview with CNBC-TV18, Banerjee and Duflo share details about the approach, lessons and implications that need be followed by India to tackle with poverty.

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Below is the verbatim transcript of the interview with Karan Thapar of CNBC-TV18. Also watch the accompanying videos.

Q: Your book Poor Economics begins by saying that to understand and then to tackle poverty we have to first resist the urge to reduce the poor to a set of clichés. We have to abandon the habit of reducing the poor to cartoon characters. For the benefit of those who haven't actually read the book, what exactly do you mean?

Banerjee: If you look at the way the poor are described, just the phrases we use - the struggling poor, the hungry poor or the lazy poor. Mohamed Younis has been talking about the entrepreneurial poor. But each of this is sort of one dimension of a human being but that's somehow defines what they think is the essence of being poor.

Q: Although poor are struggling and they are hungry. What you are saying is that the use of those adjectives creates an impression that is only partially true but largely distorting?

Banerjee: Yes and in particular that then frames the way they think about it. So Mrs Thatcher thought that what we need to do is crack the whip. Younis thinks that we need to give them micro credit and then just get out of the way. The government of India right now seems to think that we need to give them a lot of food.

It depends on who it is and which cliché is sort of on the line, but each of them drives the way the people then think. This is because they start from a framework which then makes them think this is the essential problem, so that's what they are going to solve.

Q: The real problem with those adjectives is that they impose a one dimensional framework, in other words you see them in black and white rather than in the richness of color?

Banerjee: That's absolutely right.

Q: In a recent article in Mint you are quoted as saying the poor have much more complicated life than us and they have to manage their lives like hedge fund managers. That comment would surprise many people because most of us think poverty would leads to very simple straight forward lives. Why is that not true?

Duflo: That's a general misconception but in a lot of our life we get up, we go to a job, we get a monthly salary, so in a sense things are very nice and predictable. But for a lot of the poor, about half of them run either a farm or a little business on the side, so they have to manage this activity.

Usually in a family you don't have one little business, for example you see the same women making Dosa in the morning and selling Saree's in the afternoon. Then it's the same women who also takes care of large family and doesn't have drinking water in the home, has to collect fuel. So, if you think of all the portfolio of activity of a poor person, its really rich and complicated.

Q: So what you are saying is that whereas those who are better off and  have simple straightforward jobs that give you a daily regular routine, the poor have to do multiple things to make ends meet and that multiplicity creates complications and that requires them to mange their lives as you say like hedge fund managers?

Duflo: Exactly that multiplicity creates complexity and also the fact that you can't take anything for granted. In our lives there are a lot of things that just come, our pay cheque comes and sometimes money is taken out of it to put directly another place while if you are poor you don't have a pa cheque.

Even if you don't have your business you might only pay, you might be paid everyday, irregular basis when you find a job. So all of this risk and all of this unpredictability is there for them.

Q: Unpredictability makes for complication?

Duflo: Exactly.

Q: The first surprise in your book is to discover how the poor spent money. Most of us would assume that when you are poor any extra money you get goes straight into food. But infact you have found that the poor often prefer to spend on what you call little luxuries, tastier, but most expensive food or even simple things like television and mobile phones and you said that this is both natural and sensible?

Banerjee: The presumption that you should prioritise nutrition comes out of a vision - it comes of our vision of our lives. Suppose we somehow fall sick and we have lost weight then we think we should eat more and put on weight. But that comes precisely out of the fact that this is a short-term investment, which will fix us for our long-term lives.

Whereas for the poor, they don't see their long-term lives as being something that's easily fixable. It's not that they think of them as being so - I eat a little bit more everyday, soon I am going to become a rich man or a man with a very different kind of life.

They basically see themselves likely to be where they are right now. So then the thought that I should postponed all pleasure and just invest seems wildly irrational to me.